Who pays for staff redundancy when a business goes into liquidation?

Understanding liquidation and employee redundancy payments

When a business goes into liquidation, unfortunately all members of staff will lose their jobs as part of the process. The business closes down and is permanently struck off from the Register of Companies held at Companies House. While the company should pay the redundancy costs of any staff which are made redundant, in many cases of insolvent liquidation, there is simply not enough funds to allow for this to happen.

So how do the company’s employees obtain their redundancy pay and other statutory entitlements if their employer has had to enter into an insolvent liquidation process and does not have the funds to pay staff the redundancy they are owed? 

Staff redundancy when a business is liquidated

As part of the liquidation process, company assets are sold and the proceeds used to repay creditors - which includes staff - as far as possible. If the sale of business assets doesn’t cover the redundancy payments, however, employees can make a claim through the Redundancy Payment Service (RPS).

The liquidator will provide them with the necessary claim form, offer advice on eligibility, and insight into the process/ timescale for receiving payments. Form RP1 is used to claim redundancy payments, and should be submitted within six months of redundancy.

Redundancy payments are made from the government's National Insurance Fund (NIF) which hold National Insurance Contributions made from employers, employees, and the self employed.

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Employees as preferential creditors

A statutory hierarchy exists in relation to payments made from the sale of company assets when an insolvent company is liquidated. Employees are classed as 'preferential creditors' and are high up in line when it comes to these payments being made. 

This means that in some cases, employees will have their redundancy plus other statutory entitlements including unpaid wages and arrears of holiday, paid for by the company, meaning they will not have to make a claim on the National Insurance Fund.

Can directors claim redundancy pay?

It’s a little known fact that company directors can also claim redundancy pay when their business is liquidated, so long as they meet the eligibility criteria. The payments are also made from the National Insurance Fund, via the Redundancy Payment Service.

Directors must be regarded as employees of the company to be eligible, and have received a regular salary under PAYE. So how much might employees/directors be entitled to following redundancy?

How much are redundancy payments when a business goes into liquidation?

The amount of redundancy pay depends on an employee’s age, length of service, and final wage, as follows:

• Aged 18-21: half a week’s pay for each full year of employment at the company
• Aged 22-40: one week’s pay for each full year
• Aged 41-65: one and a half week’s pay for each full year

Length of service is capped at 20 years, and weekly pay is also subject to a cap.

Employees must have worked for the company for two continuous years under a contract of employment to be eligible for redundancy payments. For directors to be regarded as employees, and therefore entitled to claim redundancy, they must also:

• Have worked a minimum of 16 hours per week in a practical role
• Be owed money by their company – their original investment in the business, for example
• Receive a regular salary through PAYE

If you would like more information on who pays for staff redundancy when a business goes into liquidation, please contact one of the team at UK Liquidators. We can explain the process further, and provide the professional support you need. We also offer same-day consultations free-of-charge, and operate a broad network of offices around the UK.